Income gap a mounting crisis

Growing discrepancy in nation's economy seen as risk to stability

DAVID J. LYNCH Bloomberg New, Times Union

By DAVID J. LYNCH Bloomberg News

Published 12:01 am, Friday, October 14, 2011

Workgroups at Zuccotti Park's "Occupy Wall Street" encampment collect trash on Thursday, Oct. 13, 2011 in New York. The owner of the private park where "Occupy Wall Street" protesters have been camped out for nearly a month in lower Manhattan gave notice Thursday that it will begin enforcing regulations that prohibit everything from lying down on benches to storing personal property on the ground. The landlord, Brookfield Properties, handed out a notice to protesters saying they would be allowed back inside after a planned park cleanup on Friday morning if they abide by park regulations. (AP Photo/Bebeto Matthews)

A widening gap between rich and poor is reshaping the U.S. economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions.

Left unchecked, the decades-long trend toward increasing inequality may condemn Wall Street to a generation of unimpressive returns and even shake social stability, economists and financial-industry executives say.

"Income inequality in this country is just getting worse and worse and worse," James Chanos, president and founder of New York-based Kynikos Associates Ltd., told Bloomberg Radio this week. "And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind."

Since 1980, about 5 percent of annual national income has shifted from the middle class to the nation's richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion -- about $109 million apiece -- beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data.

Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant U.S. economy saddled with 9.1 percent unemployment yet boasting record corporate profits. President Barack Obama last month targeted "the wealthiest taxpayers and biggest corporations" for higher taxes, saying they should pay "their fair share." That drew charges of "class warfare" from House Speaker John Boehner of Ohio.

The debate comes as demonstrations in New York by an amorphous group called "Occupy Wall Street" move into their 27th day. The rallies over what protesters call unbridled corporate power began in lower Manhattan's Zuccotti Park, a few blocks from Wall Street, and have spawned copycats in several U.S. cities.

"We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent," says the occupywallstreet.org web site.

The reference is to the fact that a sliver of U.S. households have enjoyed a disproportionate share of recent economic rewards. Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley.

Such trends have left their mark on public sentiment. Though a majority of Americans reject the idea the country is divided between "haves" and "have-nots," those seeing such a divide rose to 45 percent from 35 percent in 2009, according to a Pew Research Center poll released Sept. 29. The sharpest increase occurred among self-described political independents.

Economists such as the late Arthur Okun, a chairman of the White House Council of Economic Advisers in the 1960s, traditionally believed that societies could emphasize equality or growth, not both. Now, in an age where the quality of human capital plays a larger role in determining economic outcomes, many economists -- including Federal Reserve Chairman Ben S. Bernanke -- say the two are linked.

"The large and growing gap between the haves and have-nots will tend to undermine growth, both directly and indirectly -- including by reducing the marginal propensity to consume and by amplifying the political polarization that has already contributed to poor economic policymaking," said Mohamed El-Erian, chief executive officer of Pacific Investment Management in Newport Beach, Calif.

Branko Milanovic, a World Bank economist, added in a September article: "Widespread education has become the secret to growth. And broadly accessible education is difficult to achieve unless a society has a relatively even income distribution."

Since 1968, incomes in the U.S. have become steadily less equally distributed, according to the standard statistical measure of inequality known as the Gini coefficient. The U.S. Gini score rose from 0.39 in 1968 to 0.47 in 2010, meaning that incomes were becoming increasingly unequal. Developed by the Italian statistician Corrado Gini in 1912, the scores represent a kind of distributional thermometer, ranging from 0 (each person enjoying equal shares of income) to 1 (one person has all income).

In the 30-nation Organization for Economic Cooperation and Development, only Turkey and Mexico have more unequal societies than the U.S. In the U.S., the rich-poor gap widened by 20 percent since the mid-1980s, more than in most developed countries. "Nowhere has this trend been so stark as in the United States," the OECD concluded in a 2008 study.

Economic gains in the U.S. have been spread less equally in recent years as a result of factors including globalization, technological change, the decline of labor unions, changing social norms, and government trade and tax policies, said economists such as the World Bank's Milanovic.

"We have inequities," David Plouffe, a senior White House adviser said on "Fox News Sunday" on Sept. 25. "The American people are screaming out saying it's unfair that the wealthiest, the largest corporations who can afford the best attorneys, the best accountants, take advantage of these special tax treatments."

Not everyone shares that view. Economist Tyler Cowen, a professor at George Mason University in Fairfax, Va., said concerns over income inequality are exaggerated. "I don't think it matters one way or another for macroeconomics," he said.

Cowen said only the most extreme manifestation of inequality involving the top 1 percent of the income distribution is worrisome. And that, he said, is almost entirely a function of distorted incentives in the financial industry.

In the aftermath of the 2007-2009 financial crisis, the fortunes of labor and capital have diverged. After plunging in the two years leading to December 2008, total corporate profits have roared back to a new high of $1.5 trillion, 6.5 percent above the previous peak reached in September 2006.

The typical American household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remained below the level reached in 1997.